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Incentive compensation vs. SOX : evidence from corporate acquisition decisions

McColgan, Patrick and Hillier, David and Tsekeris, Athanasios (2014) Incentive compensation vs. SOX : evidence from corporate acquisition decisions. In: Financial Management Association Annual Meeting 2014, 2014-10-15 - 2014-10-18, Gaylord Opryland Resort & Convention Center.

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Abstract

We empirically examine the impact of incentive compensation on the riskiness of acquisition decisions before and after the passage of Sarbanes-Oxley Act (SOX). Controlling for confounding events, firm characteristics and industry fixed effects, we find a substantial change in the relation between equity-related compensation and acquisition risk post-SOX stemming from a previously unidentified shift in the effectiveness of executive stock options to control managerial risk aversion. Not only has incentive compensation failed to offset the adverse impact of SOX on risk-taking activity but it has also significantly altered managerial incentives. The decrease in acquisition risk post-SOX cannot be solely attributed to changes in the structure of executive compensation but it additionally stems from the way managers perceive compensation-based incentives in the new regulatory environment. The results are robust to different measures of acquisition risk and alternative definitions of incentive compensation.